"There is only one power that determines the course of history . . . the power of ideas." — Ayn Rand

Friday, May 12, 2017

Credit Card Fees: Who's Really Rigging the Market?

“New Jersey has a unique chance to strike a blow for consumers, free markets and even to boost its economy. Will the state take it?”

That’s how John Holub, president of the New Jersey Retail Merchant Association, started his guest column, Let’s reduce credit card swipe fees, published last June in the New Jersey Star-Ledger. But a free market entails government neutrality, in which force is banished, all transactions are strictly voluntary, and government simply bans force and fraud but otherwise protects every individual’s rights equally and at all times. A government that passed laws favoring one economic interest, such as consumers or merchants, at the expense of other economic interests, in this case the credit card companies, is not protecting a free market. It is initiating force, violating the most basic principle of a free market—the absence of aggressive, or initiatory, physical force.

What does Holub demand that lawmakers legislate?

Every time you swipe a card to pay for something, the bank that issued the card charges the merchant a fee to process the transaction. The problem is that MasterCard and Visa control a dominating 80 percent of the market, enough control to price-fix these fees at exorbitant levels with little competition.

Now a bipartisan group of legislators wants to fix this rigged market. Their bills (A752 and S1924) would throw open the market to competition by permitting merchants to pick which network they will use to process their credit card transactions.

Right now, if a customer whips out a Visa card at a restaurant or gas station, the merchant must use Visa's network to process the transaction. But with merchants free to use any number of networks at their discretion, the networks will have to compete and fees will fall.

So Visa and MasterCard setting terms and prices for their own product by voluntary agreement with merchants is “price fixing.” But the NJRMA seeking legislative favors forcing their terms on Visa and MasterCard is not. Sounds like Newspeak. George Orwell must be chuckling, “I told you so.” Visa and MasterCard have a right to set the condition that only they can process sales transacted with their cards. Holub’s answer to that is that Visa and MasterCard are monopolistic, and cites AT&T as an analogy:

We know it will work because we've seen lots of evidence. Consider AT&T, where long-distance calls were hugely expensive until in the 1980s. The government required that consumers have a choice of carriers. Rates plummeted from dollars a minute to mere cents.

The analogy to AT&T is ridiculous. AT&T was a government-enforced monopoly. Competition was legally forbidden until Congress acted. That is not the case with credit cards. Visa and MasterCard are not monopolistic in any way. They are open to competition. Their 80% market share is earned by the voluntary choices of merchants and consumers. The merchants benefit by accepting Visa and MasterCard. Otherwise, why accept them? But they want to have their cake and eat it, too. They want the benefits of the business Visa and MasterCard bring them, without having to abide by voluntary contract with them.

Holub also cites the example of debit cards: “Congress reformed the way Visa and MasterCard dominate that market by requiring the banks' costs be reasonable compared with their profits.” But two wrongs don’t make a right. Price controls are immoral and contrary to the principles of a free market.

Visa and MasterCard have a great product that fosters commerce and they are profiting handsomely from it. But remember that the credit card business is highly competitive. I get solicitations all the time, with banks falling all over themselves to offer better “cashback” or “rewards” incentives to use their cards.

Visa and MasterCard can not “rig the market.” They can only set terms relating to their own product, which merchants are free to accept, attempt to negotiate terms more to their liking, or forego doing business with Visa and MasterCard. Only government, with its law-making power of the gun, can rig. That’s what the merchants are after. Granted, Visa and MasterCard undoubtedly have their own lobbyists sometimes seeking to get legislation that favors them. That’s wrong, too—although most lobbying is likely designed to fight against legislation that hurts them. And in this case, the banks are playing defense.

Holub has no business waving the free market banner. What he advocates is the exact opposite of free market economics. It’s pure cronyism for the NJRMA to try to get lawmakers to rig the contract terms in their favor.

NOTE: As of this time, the bills Holub supports, A752 and S1924, have not been enacted by the New Jersey legislature.

About Me

Greetings and welcome to my blog. My name is Michael A. (Mike) LaFerrara. I sometimes use the pen or "screen" name "Mike Zemack" or "Zemack" in online activism, such as posted comments on articles. “Zemack” stands for the first letters of the names of my six grandchildren. I was born in 1949 in New Jersey, U.S.A., where I retired from a career in the plumbing, building controls, and construction industries, and still reside with my wife of 45 years. The purpose of my blog is the discussion of a wide range of topics relating to human events from the perspective of Objectivism, the philosophy of reason, rational self-interest, and Americanism originated by Ayn Rand.

As Rand observed: “The professional intellectual is the field agent of the army whose commander-in-chief is the philosopher.” I am certainly not the philosopher. But neither am I a field agent, or general. I am a foot soldier in that Objectivist army that fights for an individualist society in which every person can live in dignified sovereignty, by his own reasoned judgment, for his own sake, in that state of peaceful coexistence with his fellow man that only capitalist political and economic freedom can provide. While I am a fully committed Objectivist, my opinions are based on my own understanding of Objectivism, and should not be taken as definitive “Objectivist positions.” For the full story of my journey toward Objectivism, see my Introduction.

One final introductory note: I strongly recommend Philosophy, Who Needs it, which highlights the inescapable importance of philosophy in every individual's life. I can be reached at mal.atlas@comcast.net. Thanks, Mike LaFerrara.

Recommended Essays/Videos

Quotes I Like

Let me give you a tip on a clue to men’s characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it. Run for your life from any man who tells you that money is evil. That sentence is the leper’s bell of an approaching looter.—Francisco d'Anconia

I love getting older...I get to grow up and learn things. Madalyn, 5 years old, Montesorri student, and my grand-daughter

The best thing one can do for the poor is to not become one of them. Author Unknown

Nature, to be commanded, must be obeyed. Francis Bacon

Freedom is never more than one generation away from extinction. Ronald Reagan

Thinking is hard work. If it weren't, more people would do it. Henry Ford

Intellectual freedom cannot exist without political freedom; political freedom cannot exist without economic freedom; a free mind and a free market are corollaries. Ayn Rand